How much do you need to save to enjoy your retirement?

Working out how much to save for retirement depends on your lifestyle choices. What’s right for someone accustomed to a more lavish way of life won’t be the same for someone who’s more thrifty with their money.

However, there are some useful retirement savings guidelines that anyone can use to help calculate how much to save for by retirement age. Here’s how to get a rough estimate of how much you should be saving without using a retirement savings calculator.

How much you need to save for retirement depends on several factors. These include:

• How you want to live during your retirement years
• How much you earn now
• How much you currently spend to maintain your lifestyle
• How much you currently have saved in savings accounts, investments, and equity

While factors concerning your current expenditures and savings are more tangible, questions regarding how you want to spend your retirement are more conceptual. Depending on whether you imagine yourself spending your twilight years exploring the world, staying at home with your family, or enjoying trips to the spa, how much you need to save for retirement will differ dramatically.

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It’s also important to consider that your costs will change once you reach retirement. While you may end up paying more on medical-related expenses, you may reduce the amount you spend on groceries each month as you opt to cook more at home. Additionally, while you may have paid off your mortgage, you may spend more on travel expenses. It all depends on the kind of life you want to lead later on.

While it may seem strange to think about the kind of lifestyle you want to have in your late sixties and upwards, it plays a vital role in working out how much to save for retirement. By asking yourself this question now, you set yourself up to enjoy a way of life that aligns with what you value most. 

Now that you have a vague idea of the kind of lifestyle you’d like to lead in your later years, there are three more questions you need to consider:

1. At what age do you want to retire? The earlier, the more money you’ll require.
2. How many years do you have until you reach this age? The more the better as it’ll give you longer to save!
3. How great are the returns on your investments? The higher your returns, the quicker you’ll reach your retirement savings goal.

In general, the figure you should aim to live off per year in retirement is 70 - 90% of your annual pre-retirement income. This amount should be comprised of your savings and any additional social insurance funds issued by your government. 

This means that if you were earning €58,000 a year when you retire, you’d need enough in savings to live off between €40,000 and €52,000 a year until the end of your life. If you retire at 67 and live until you’re 85, that’s 18 years’ worth of savings you’ll need to have saved to live comfortably. According to this example, you’ll need to have accrued between €720,000 and €936,000 by the time you retire.

If these sound like impossibly large figures, don’t worry. There are many tips and tricks you can use to get on track for a comfortable retirement and the following 15% rule could also prove highly useful.

According to Fidelity, a pension-focused international investment company, between the ages of 25 and 67, you should aim to contribute around 15% of your pre-tax income each year towards your retirement fund. In doing so, you’ll ensure that you’ll be able to continue living the same lifestyle as you are currently in your retirement. 

Fidelity reached this figure by assuming that, thanks to government support schemes, not all of your pension fund will need to come exclusively from your savings. Thus, most people will need to generate 45% of their pension fund from their savings. So, by putting aside 15% each year from the ages of 25 to 67, you’ll be able to save this amount. However, if you start saving a little later than 25, Fidelity calculates that if you start saving 15% of your pre-tax income at age 35, you should be able to retire by the time you’re 65. 

If you’re finding all these figures confusing, it might be worth looking for an online retirement savings calculator—and there are plenty to choose from. Nerd Wallet’s retirement calculator offers a particularly detailed breakdown of your current income, what you need to save for your retirement, and your projected savings.

The calculator works by taking your current age, income, savings, and monthly savings contributions into account. It then adjusts its retirement savings calculation according to the following:

• A 3% inflation rate
• A 2% salary increase each year
• A 6% rate of return pre-retirement
• A 5% rate of return in retirement

Additionally, you can also fine-tune the calculator to take into account:

• The amount you expect to receive in government support packages 
• How much you expect to spend in your retirement
• How much you expect to get in returns on your investments before retirement

No matter what your circumstances, the most important factor when saving for retirement is to start as early as you can. This is because the earlier you start, the more money you can make via the phenomenon of compound interest. Creating a snowball effect, compound interest accumulates when the interest your savings generates begins to generate interest itself. Over time, this can seriously add up.

If putting 15% aside in savings every month is too much for you currently, then you can try taking on the 1% challenge. This means that you add 1% to whatever percentage of your monthly income you’re currently able to put towards your pension. This may not sound like much, but over the course of many years, this can amount to a serious savings contribution.

Once you’ve decided how much you want to put towards your retirement savings plan each month, automate your monthly transfers. This means you’re less likely to miss a payment and ensures that saving for your retirement becomes a habitual behavior. However, be sure to adjust how much you are saving if your monthly income amount changes—your pension fund also wants to benefit from your new pay rise!

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